The effect of national energy policies on a local Swedish district heating (DH) system has been studied, regarding the profitability of new investments and the potential for climate change mitigation. The DH system has been optimised regarding three investments-biomass-fuelled CHP (bio CHP), natural gas-fuelled combined cycle CHP (NGCC CHP) and biomass-fuelled heat-only boiler (bio HOB) in two scenarios (with or without national taxes and policy instruments) In both scenarios EU's tradable CO2 emission permits are included. Results from the study show that when national policies are included. the most cost-effective investment option is the bio CHP technology. However, when national taxes and policy instruments are excluded, the DH system containing the NGCC CHP plant has 30% lower system cost than the bio CHP system. Regardless of the scenario and when coal condensing is considered as marginal electricity production, the NGCC CHP has the largest global CO2 reduction potential, about 300 ktonne CO2 However. the CO2 reduction potential is highly dependent on the marginal electricity production. Demonstrated here is that national policies such as tradable green certificates can, when applied to OH systems, contribute to investments that will not fully utilise the DH systems' potential for global CO2 emissions reductions (C) 2010 Elsevier Ltd All rights reserved.